Royal Bank of Scotland' s (RBS) decision this week to bolster provisions for business misconduct-related charges has left the lender on course to report a hefty full-year loss next month. And yet more provision pain could be on the cards, too.
The lender is setting aside £1.9bn to cover US fines for mis-selling mortgage-backed securities, but this could prove too little. "We continue to assume that further provisions of circa £1bn may be required," reckons banking analyst Ian Gordon of Investec Securities. RBS also boosted its interest rate product mis-selling compensation charge by £500m to £1.25bn. But that remains £250m less than Barclays' (BARC) provision, even though RBS has three times as many cases. Mr Gordon thinks "a further provision of at last £500m" could be needed here in 2014. RBS's PPI provision was also increased by £465m, bringing the cumulative PPI-related total to £3.1bn. Overall, that leaves RBS set to report a painful £7.1bn pre-tax loss for 2013, according to Investec.
The charges also have implications for RBS's capital adequacy and the bank's 2013 Basel III core tier one capital ratio is now expected to be no higher than 8.5 per cent. That's weak compared with peers and well behind RBS's 11 per cent target for end-2015 - leaving the pressure on the business to sell further assets to raise capital.
